Wind and Solar Are Our Cheapest Electricity Generation Sources. Now What Do We Do?

Debates about the future of America’s electricity system have long centered on a binary choice between lowering costs or decreasing pollution. But that has changed. In many parts of the country, new renewables are simply the cheapest resource.

Financial advisory and asset management firm Lazard’s 10th annual report on the levelized cost of energy (LCOE) for different electricity-generating technologies shows renewables are the cheapest available sources of electricity (other than efficiency) even without subsidies — a trend confirmed by similar analyses of wind and solar costs from Lawrence Berkeley National Laboratory.

With subsidies, in some places new wind is even cheaper than the short-term marginal costs of existing fossil-fueled plants, raising new questions about whether these plants should be retired early.

What does "levelized cost of energy" mean?

Lazard’s LCOE analysis identifies how much each unit of electricity (measured in megawatt-hours) costs to generate over a power plant’s lifetime. LCOE represents every cost component — capital and financing expenditures to build; operations and maintenance; and fuel costs — spread out over the total lifetime megawatt-hours generated.

Because different plants have different operating characteristics and cost components, LCOE represents the best way to fairly compare different technologies. Think of it evenly comparing apples to oranges.

How wind and solar are winning the day

According to Lazard, today’s wind costs are one-third what they were in 2009, falling from $140 per megawatt-hour to $47 per megawatt-hour in just seven years.

Lazard’s cost estimates are consistent with reported prices of contracts for wind, with several wind contracts in the low $20s and high $10s.

However, these numbers don’t tell the whole story. Though wind power is the cheapest it’s ever been, wind costs were well below their 2009 peak in the early to mid-2000s, mostly due to low labor and commodity prices, and they vary widely depending on regional wind resources — from the low $30s in the Great Plains region and Texas to the $60s in California and the Northeast.

Utility-scale solar’s cost declines have been even more dramatic, falling 85 percent since 2009 to today’s range of $46 to $61 per megawatt-hour.

Lawrence Berkeley National Lab confirms Lazard’s solar costs in a compilation of 2014-2015 solar prices, with several contracts coming in well below $40 per megawatt-hour, taking advantage of the 30 percent federal Investment Tax Credit. Like wind, insolation varies by region. For example, very little solar gets built in the Northeast where the same solar plant only generates 68 percent of what it would generate in the Southwest and California at similar cost.

As old plants retire, utilities should compare wind and solar with the cheapest form of new conventional fuel-fired generation today — natural-gas-fired combined cycle power plants with LCOE ranges from $48 to $78 per megawatt-hour.

The case for wind and solar as the grid’s cheapest resources becomes even clearer when federal subsidies are considered: Tax credits drive renewable energy’s costs down to $17 to $47 per megawatt-hour for wind and $37 to $49 per megawatt-hour for solar.

The all-in price of wind is not only cheaper than building new natural-gas plants in most of the country — new wind beats some fossil fuel power plants on their marginal cost (i.e,. costs for operating, maintaining, fueling, etc.) alone. In other words, it’s now cheaper in a significant number of places to build new wind than simply continuing to operate an existing coal and nuclear plant. And all-in costs for solar are not far behind.

This precipitous drop in wind and solar prices means utilities and their regulators need to keep up on the latest numbers, or else they’ll be driving blind when deciding on investments in new infrastructure and whether existing plants should be retired.

How can this impact overall system costs?

Like any generation technology, wind and solar impact overall system dynamics, including which resources and infrastructure are needed as complements. But claims about integration costs of variable resources like wind and solar are often overstated.

A recent National Oceanic and Atmospheric Administration (NOAA) study used high-quality, granular hourly weather data to find complementary wind and solar resources and considered the outcomes of linking them with a national high-voltage direct current (HVDC) transmission backbone. NOAA found 80 percent zero-carbon generation, including over 50 percent wind and solar, could provide reliable service at lower cost than today’s power mix by 2030 without increasing hydro or battery storage capacity.

It turns out Lazard’s cost numbers already approach the lowest-cost assumptions from the NOAA study, meaning NOAA’s most generous assumptions about cost declines by 2030 are nearly a reality in 2017. For example, in its “low renewable high gas cost” scenario, NOAA used $1.19/watt for solar’s capital plus O&M costs. In Lazard’s recent report, solar capital plus O&M costs have already fallen to $1.44 to $1.59 in 2016.

This highlights the need for models and the policymakers that use them to ensure cost data is up to date. Failure to do so could lock in hundreds of billions of investment in uneconomic natural-gas infrastructure.

The costs of integrating high shares of wind and solar become much higher without the HVDC backbone, as resource-poor regions can’t access the windiest and sunniest (and thus cheapest) places to generate wind and solar power. Costly, drawn-out processes for siting transmission and power plants and allocating costs of multi-state transmission lines further drive up project costs and stifle investment. (Policymakers can turn to America’s Power Plan for recommendations on streamlining the siting process and limiting local impacts to reduce siting costs for renewables.)

How should policymakers and utilities use these new numbers?

Even with these new numbers, more natural-gas plants are being built every week, expensive coal is not retiring as fast as economics would dictate, and the transition to renewable energy isn’t happening fast enough to prevent the worst effects of climate change.

Two misconceptions limit renewable energy deployment even in the face of wind and solar’s drastic cost declines: 1) misguided alarmism about the reliability of renewables, and 2) misconceptions of the cost of running the grid with more renewables.

Managing America’s grid with variable renewables also requires rethinking how we operate and plan our electricity systems to provide reliable service, and many utilities and wholesale markets have been slow to adapt.

Grid operators sometimes claim we need to back up solar and wind with an equal ratio of thermal generators or storage for “when the sun doesn’t shine and the wind doesn’t blow,” but the NOAA study shows additional transmission and better regional coordination can do it much more cheaply. A National Renewable Energy Laboratory (NREL) analysis corroborates NOAA’s findings, showing we could quadruple the amount of wind and solar on the grid today without reliability issues.

Besides reliability, many argue wind and solar come with insurmountable integration costs, including backup generation and transmission lines to connect remote locations to the grid. While this is true, estimates of wind integration costs generally fall within a modest $2 to $7 per megawatt-hour range, even at high penetrations.

Variations in integration cost studies reflect the difficulty of attributing integration costs to any one technology across a big grid, where a diverse mix of power generation linked by robust transmission naturally smooths variability — much like an index fund versus a single volatile stock, for example.

Conventional thermal generation like natural gas, coal, and nuclear power also require new transmission, fuel supply and storage, and large backup reserves. These can also be counted as “integration costs,” even without accounting for the health and climate costs of carbon dioxide and other pollution, which can exceed $25 per megawatt-hour for natural gas, and $60 per megawatt-hour for coal.

A new paradigm

Transitioning our electricity sector away from fossil fuels is no longer just an environmental imperative — it’s an economic one. Free markets now favor solar and wind. Consider gas-rich Texas, which has more than three times more wind capacity than any other state, and where solar is expected to grow 400 percent by 2022.

Outdated policies and data render us unprepared to take full advantage of wind and solar’s rapid cost declines. Failure to adapt to rapidly changing cost numbers will result in uneconomic investments locking in emissions. For America to compete in the energy innovation race, it’s time to adopt a paradigm where wind and solar form the backbone of our electricity grid.

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Founded in 2003, the Prometheus Institute is a non-partisan US-based non-profit delivering insight and action dedicated to achieve sustainable and universal economic, industrial, environmental, and human development...